Should Borrower Just Walk Away From a Vacation Home?
A borrower who owes more on a Florida vacation condo than it’s worth wonders if foreclosure is the best option vs. a short sale.
Question: I am going through a short sale process right now for my condo in Sarasota, Florida. I bought the property in 2005 and was moved by my employer to California a few months ago. Therefore, I have no use for the place now, and cannot afford the monthly mortgage payments, maintenance fees, taxes and general upkeep.
There is a 1st and 2nd mortgage on the property: One is owed about $350,000, and the second lien holder is about $50,000. According to a recent CMA/Appraisal, the property is now only worth $290,000. Both of the lien holders are going to submit 1099C forms to the IRS. That will result in me paying taxes on about $110,000! If I walk away and they foreclose, do I need to pay anything? I don’t care much about my credit record at this point! Can the lien holders come after me after a foreclosure?
Answer: Definitely stick with the short sale. In either case, since this is considered an “investment property” or “second home” by the IRS and not your primary residence, you’ll be on the hook for taxes on the shortfall between the final sales price and the amount owed on the mortgages. Plus with a foreclosure, if you personally signed on the note, the lenders won’t forgive your debt without first trying to collect the shortfall from you, according to a local real estate attorney that I recently spoke with.
Unfortunately, investors like you who bought a second home at the top of the market and have seen it drop in value get no relief from the federal government since this is not your primary residence. The IRS counts debt forgiveness – the difference between the home’s sale price and the amount owed on the mortgage(s) – as regular income, although there are exceptions for bankruptcy, insolvency, forgiven deductible mortgage interest and seller-financed debt. You also cannot deduct losses from price declines or expenses you incur for real estate brokers, attorneys or others involved in the sale. Primary homeowners, however, get a break from being taxed on the shortfall, at least until December 31, 2012, thanks to the Mortgage Forgiveness Debt Relief Act of 2007.
Unfortunately, you are stuck, although the short sale does have several advantages over the foreclosure. Some lenders don’t report short sales to credit bureaus, or report them as “paid as agreed”; and even if they do, you’ll likely have a lighter hit to your credit score than if you had a foreclosure. If you buy a home again in California, the loan application will ask if you have ever had a foreclosure; it won’t ask about a short sale. Moreover, under Fannie Mae guidelines, if you have a short sale and have been current on your payments, you may qualify to buy another home immediately; or within two years if you were in arrears. However, if you go through a foreclosure, the wait is 7 years.
But perhaps you have other options. You mention that you were moved by your employer, so I assume you are receiving the same salary that you had when you bought your Florida condo four years ago. You also state that you can no longer afford payments, but don’t explain why. Unless you’ve suffered a setback like a medical emergency, or you have a co-signer on the loan(s) who is now unemployed or has died, I don’t understand why your lender would accept your hardship letter and approve a short sale. Generally, you must prove a hardship in order to qualify for a short sale. With some lenders there are exceptions, but very few.
Lenders don’t consider not being able to use a place as sufficient reason to grant a short sale; after all, you can always rent the place out until prices improve. If your financial circumstances haven’t changed, and you truly can afford this condo, I suggest that you do that, even if the rent doesn’t cover all of your expenses. It’s a much better alternative than having your credit ruined, or exposing yourself to prosecution for fraud.
